Home Sales Rose 4.3% in January: Is It Time to Buy?

For sale
For sale

The National Association of Realtors reported this week that sales of existing homes rose 4.3% in January. That makes three out of the past four months where sales of existing homes have climbed, according to the association, giving prospective home buyers cause to wonder if now's the time to sign on the dotted line to buy.

Don't let the fear of higher home prices drive you into a rash purchasing decision, advise economists. There are other trends to consider -- ones that are much more telling than the modest uptick in sales.

Sales Up, but Prices, Not So Much

First up, let's look at home prices. In January, the nationwide median price of an existing single-family home was down 2.6% from a year ago to $154,400. The NAR noted that home prices were down throughout every region in the U.S., with the Northeast hit the hardest with a 4.2% decline to $225,700, while the South saw the smallest drop, with a 0.3% decline to a median price of $122,000.

Basically, that means it's cheaper to buy a home now than it was a year ago. And it may continue to get cheaper still.
"Generally, home prices are still falling, but at a slower rate," says Conrad DeQuadros, senior economist with RDQ Economics. "The major downward pressure on pricing is the abundant supply of homes and a backlog of foreclosures that the banks are sitting on. These major issues suggest prices will continue to decline in the near term."

And what constitutes near term? At least through the end of this year, says DeQuadros.

A Better Weather Vane to Watch

The NAR figures offer just one data point for home buyers. DeQuadros suggests that consumers look at the S&P/Case-Shiller Home Price Indices.

The Case-Shiller figures are the most comprehensive because they measure comparable homes for resale, rather than just homes that were sold. The indices track 20 metropolitan areas within the U.S.

Next week, the S&P Indices will release Case-Shiller figures for the month of December. According to November results, home prices declined 3.7% over year-ago figures, with only Detroit and Washington, D.C., posting gains.

House Prices
House Prices

"I would not expect to see encouraging figures," says David Blitzer, managing director and chairman of the S&P Indices Index Committee. In other words, expect to see more red than black in the home sales data.

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Even then, December's numbers cannot be viewed in isolation. "Home prices are usually one of the last things that improve. First, you'll usually see more foot traffic [with prospective buyers], then you'll see sales improve and then prices will begin to move up," Blitzer says.

One of the real tests as to whether the bottom has been hit will come toward the end of summer, Blitzer says. He noted May through July is usually the strongest time for sales.

Falling Prices vs. Rising Interest Rates

With home prices continuing to fall, consumers may face a dilemma should interest rates begin to rise.

"Interest rates are at a very low level now, but not everyone is able to get them since lending is tight," says DeQuadros. "I am not convinced the interest rates will remain at this level for the rest of the year. My feeling is this level won't be sustainable."
He noted while the interest rate on a conventional 30-year mortgage was 3.87% last week, he believes it could move closer to 5% by the end of the year.

Blitzer offered this advice: "If you find a fantastic house -- unless you see another buyer around the corner, I would haggle for awhile."